Commodity futures options are a risk management tool. Just as commodity producers use commodity investing as a hedging strategy to guard against commodity price fluctuation speculators use options trading. The premium for commodity futures options is a cost of doing business. This cost is offset by traders not needing to pay trading fees if options contracts are not exercised. The premium becomes insignificant in the event of a substantial and profitable market move.

Commodity futures options typically provide the buyer with the right but not the obligation to buy or sell a futures contact up until contract expiration. However, there are some new ways to trade options including corn calendar spread options. These are options contracts on the month to month variation in futures contract prices. In general commodity futures options reduce trading risk and act as a way of leveraging capital for potential gain. As stated by the Chicago Mercantile Exchange, “With options, traders can construct [trading strategies] that profit in advancing, declining or even stable markets, while at the same time reducing risk and increasing leverage. In addition, because options also can be used to protect against adverse price moves in livestock, interest rate, foreign exchange and equity markets, they have become an increasingly popular hedging vehicle. Today corporate treasurers, bankers, farmers and equity portfolio managers throughout the world benefit from using options as risk management tools.”

The very same options strategies that work for other equities are applicable in commodity futures options. Traders often engage in long straddles by buying both a put and a call on a commodity future. The contracts are for the same commodity and expiration date. This strategy works well in a volatile market as the trader will profit from either an up turn or down turn in commodity prices. If the commodity price does not change the trader’s cost is two premiums. In the case of a stagnant market a trader engaging in a short straddle strategy will profit by selling a put and a call on the same option for the same expiration date. As in all futures and options trading the use of technical analysis tools such as Candlestick chart formations will help the trader see the market more clearly.

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